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The GFC and how it happened

Went to a talk about the GFC, what caused it and what’s the outlook. It was given by a Socialist Alliance member, K, and there were other contributors. I’ve amalgamated all the info.

Basically, the GFC – which will probably get worse for the next decade at least, started in the 1980s – an era when the mantras were “Greed is good”. Words and phrases such as “impossible” or “can’t be done” were for losers.

Taking notes.

In the US, giant companies such as General Electric (GE) made mechanical goods — washing machines and missiles. But the end of the 1980s, it discovered it could make bigger profits by investing in the financial industry. By the 1990s, GE’s financial arm was making 10 times more than its industrial goods section. GE went into debt because there was a lot of cheap money around to borrow, thanks to developing economies (eg workers in China – paid a pittance – but still able to save.) GE then used these loans to invest in financial “bubbles”, such as the internet “Tech wreck” bubble of 2001 and the recent Home Loans bubble and initially got large returns.

Because GE was such a giant company and corporate leader, other companies began copying its example and investing in financial products. Car makers jumped in, as they were mechanical goods manufacturers too. That’s why the US car companies crashed first, because they were so exposed to financial products.

A year before the crisis, everyone was saying how great US investment bank Lehman Bros was. That’s why everyone copied them. A “herd” mentality developed because every company is under pressure to think: “How can I grow faster than my competitors? Where can I invest for the best return? Selling mechanical goods or financial products?”

Everyone jumps on the bandwagon as they don’t want to be left behind.

Companies could make more profit out of financial “bubbles” than their mechanical goods, such as the 2001 internet tech wreck bubble, and the 2007 bubble of investing in others’ ability to pay off loans.

EXPLANATION OF THE HOME LOAN BUBBLE

As markets stagnate, businesses needed more income streams, so they started offering debt to low-income earners.

Interested crowd.

Home loans were offered at a very low rate for four years but when that honeymoon period ended, they had to pay eight times more and couldn’t afford it.

The three main problems with the loans markets were:

The banks ran out of people to sell loans to — “the demographic was saturated”, so they targeted low-income earners with high interest loans.

When the low-interest rate period ran out, wave after wave of people couldn’t pay and were kicked out of their homes.

This income stream dried up, and this bubble collapsed.

Companies had taken out loans to make these financial investments, so now they were in trouble too.

By 2005, the amount of money invested in speculation was worth 14-times the value of the real economy. The real economy is made up of tangible goods with actual value (eg. shoes, cars).

“The economy is a finite platter. There were no more future income streams.”

European markets and Iceland, which were very reliant on financial products, crashed.

“The problem of 14-times speculation has not gone away. People think if we just pull out heads in and knuckle down a bit, we’ll be OK. We won’t. The good life won’t continue.

“The derivatives market is worth $60 trillion and hangs over our heads like a cement slab. It’s based on nothing of real value. Governments will have to make huge cuts in services — social welfare, education, the environment.”

“This isn’t a normal recession – it’s a long-term slump and we’re going to see some serious and disturbing things over the next decade.”

Big companies continually lobby US presidents for legislation that will favour their industries — the big companies that are advising Obama are mainly financial ones (Goldman Sachs etc) and from the coal industry.

AUSTRALIA’S ECONOMIC HISTORY

In 1970, wages were 53 per cent of GDP (Gross Domestic Product).

In 2005, wages were 45 per cent of GDP.

Workers’ wages have gone down compared with what they’re producing.

In 1960, household debt was 40 per cent of GDP.

In 2007, household debt was 100 per cent of GDP.

From 1850 to 1970, hourly wages increased. Since 1970 it has plateaued, yet in the same period, productivity has skyrocketed because workers have been doing more with improved technology.

Real wealth expanded from World War II but has been declining since the 1970s.

Debt has been used to fuel capitalism.

The problem is that companies are too greedy and keep trying to create more income streams. So they now pay workers less in real terms compared to years ago, bombard society with advertising (“You’re a loser if you don’t have product A” etc.), and then people go into debt to pay for goods. This debt, via credit cards and loans, are another income stream for capitalists. But maybe they could just pay workers a fair wage so they wouldn’t have to go into debt?

Welfare – disadvantaged should get it, instead of being forced to jump through hoops and being denied.

Environment – invest in renewables.

The public should control everything.

Tax the rich, not the poor, by 70 to 80 per cent.

Workers rights and conditions should be fair.

Join a union and work for more control and regulations of unsustainable investments.

Minimise debt.

UNIONS

Gillard has given employees “WorkChoices Lite”. Manufacturing unions are in trouble, with work being sent offshore. The ability to fight for rights is still illegal.

THE US v CHINA

Is China going to be the world’s next superpower?

No, that’s scary talk from right-wing capitalists who want to fool us. The US will be dominant for ages – it’s still a very rich country and it would have to be conquered in a World War III to lose its position.

The top layers of the Communist Party are intent on creating capitalists.

There are still a lot of poor people in China.

China has a lot of the middle class have been laid off.

IS AUSTRALIA A WORLD LEADER IN ANY WAY?

Rudd has an agenda to get rid of the UN and start another world organisation. And maybe write another children’s book.